An anticipatory hedge is a contract purchased in expectation of needing a commodity at a later date.
The basis is the difference between the cash and futures prices for a commodity. A trader is long the basis if he bought the commodity and hedged with a sale of futures contracts, or short the basis if he bought the futures as a hedge against a commitment to sell in the cash market. The basis has implications for the markets, its participants and the commodities traded.
A trader needs to be able to calculate the net results of long and short hedges in both rising and falling markets. She must also be able to determine net prices factoring in both hedged and unhedged positions.
- A trader is long 100 wheat contracts and is concerned about rumors of rising prices so he shorts 50 contracts. This is an anticipatory hedge.
- In August, the November futures price for a commodity is $2 and the cash price is $1. For the last three years, the cash price in August was $1, but the November futures price was closer to $3. The December futures price is $1.80. Which statement is false?
- The basis is $1 under November.
- The market is in contango.
- The market is weaker than historical norms.
- The producer need not deliver immediately in the cash market.
- The implied repo rate
- is a proxy for the risk-free rate
- is a critical concept in agricultural commodity futures trading
- rises with futures prices
- approaches zero as the futures contract's delivery date near
Receives cash forward (July) bid at 128/cwt
Sells July ethanol futures at 138/cwt
Sells cash ethanol at 125/cwt in the spot
Buys July ethanol futures at 130/cwt
- Which statement is true about this chart?
- The market is in backwardation.
- The hedger gained 8 cents/hundredweight in the futures market.
- Prices are rising in the market.
- This is a long hedge.
- In a backwardation market, basis strengthens.
- Basis is impacted by all of the following items except
- Local supply and demand
- Substitute availability
- Middleman's fees
- A long hedger may enter into an anticipatory hedge
- With contango
- Cash prices exceed futures prices.
- Near delivery month contracts are cheap relative to later months.
- Futures prices exceed cash prices.
- Cash and futures prices are identical at contract expiration.
- A hedge may
- Completely reduce risk.
- Partially reduce risk.
- Both a. and b.
- Either a. or b.
- All futures contracts offer delivery as a settlement option.
InvestingThe benefits of ETFs for hedging are clear and investors of all sizes are taking notice.
InvestingIt’s important for both hedgers and speculators to know whether the commodity futures markets are in contango or normal backwardation.
TradingBoth forward and futures contracts allow investors to buy or sell an asset at a specific time and price.
TradingLearn how investors use strategies to reduce the impact of negative events on investments.
InvestingContango is when the futures price of a commodity is higher than the expected future spot price.
InvestingIf you are a hedger or a speculator, gold and silver futures contracts offer a world of profit-making opportunities.